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proﬁt. Examples abound of innovative ﬁrms (McDonald’s, Blockbuster Video) that

started out as monopolistic competitors in localized markets but soon gained con-

siderable national market power, with the attendant economic proﬁt.

For the typical ﬁrm, however, the shortcomings of monopolistic competition in

relation to technological advance are the same as those of pure competition. Most

monopolistic competitors remain small, which limits their ability to secure inex-

pensive ﬁnancing for R&D. In addition, monopolistic competitors ﬁnd it difﬁcult to

extract large proﬁts from technological advances. Any economic proﬁts from inno-

vation are usually temporary, because entry to monopolistically competitive indus-

tries is relatively easy. In the long run, new entrants with similar goods reduce the

demand for the innovator’s product, leaving the innovator with only a normal

proﬁt. Monopolistic competitors, therefore, usually have relatively low expected

rates of return on R&D expenditures.

OLIGOPOLY

Many of the characteristics of oligopoly are conducive to technological advance.

First, the large size of oligopolists enables them to ﬁnance the often large R&D

costs associated with major product or process innovation. In particular, the typi-

cal oligopolist realizes ongoing economic proﬁts, a part of which is retained. This

undistributed proﬁt serves as a major source of readily available, relatively low-

cost funding for R&D. Moreover, the existence of barriers to entry gives the oligop-

olist some assurance that it can maintain any economic proﬁt it gains from

innovation. Then, too, the large sales volume of the oligopolist enables it to spread

the cost of specialized R&D equipment and teams of specialized researchers over a

great many units of output. Finally, the broad scope of R&D activity within oligop-

olistic ﬁrms helps them offset the inevitable R&D misses with more than com-

pensating R&D hits. Thus, oligopolists clearly have the means and incentive to

innovate.

But R&D in oligopoly also has a negative side. In many instances, the oligopo-

list’s incentive to innovate may be far less than we have implied above, because oli-

gopoly tends to breed complacency. An oligopolist may reason that it makes little

sense to introduce costly new technology and produce new products when it cur-

rently is earning a sizable economic proﬁt without them. The oligopolist wants to

maximize its proﬁt by exploiting fully all its capital assets. Why rush to develop a

new product (say, batteries for electric automobiles) when that product’s success

will render obsolete much of the ﬁrm’s current equipment designed to produce its

existing product (say, gasoline engines)? It is not difﬁcult to cite oligopolistic indus-

tries in which the largest ﬁrms’ interest in R&D has been quite modest—the steel,

cigarette, and aluminum industries, for example.

PURE MONOPOLY

In general, the pure monopolist has little incentive to engage in R&D; it maintains

its high proﬁt through entry barriers that, in theory, are complete. The only incen-

tive for the pure monopolist to engage in R&D is defensive: to reduce the risk of

being blindsided by some new product or production process that destroys its

monopoly. If such a product is out there to be discovered, the monopolist may have

an incentive to ﬁnd it. By so doing, it can either exploit the new product or process

for continued monopoly proﬁt or suppress the product until it has extracted the

maximum proﬁt from its current capital assets. But, in general, economists agree

that pure monopoly is the market structure least conducive to innovation.

320 Part Two • Microeconomics of Product Markets

Inverted-U Theory

Analysis like this has led some experts on technological progress to postulate a so-

called inverted-U theory of the relationship between market structure and techno-

logical advance. This theory is illustrated in Figure 12-6, which relates R&D

spending as a percentage of a ﬁrm’s sales (vertical axis) to the industry’s four-ﬁrm

concentration ratio (horizontal axis). The inverted-U shape of the curve suggests

that R&D effort is at best weak in both very low concentration industries (pure com-

petition) and very high concentration industries (pure monopoly). Starting from the

lowest concentrations, R&D spending as a percentage of sales rises with concentra-

tion until a concentration ratio of 50 percent or so is reached, meaning that the four

largest ﬁrms account for about one-half the total industry output. Beyond that, rel-

ative R&D spending decreases as concentration rises.

The logic of the inverted-U theory follows from our discussion. Firms in indus-

tries with very low concentration ratios are mainly competitive ﬁrms. They are

small, which makes it difﬁcult for them to ﬁnance R&D. Entry to these industries is

easy, making it difﬁcult to sustain economic proﬁt from innovations that are not

supported by patents. As a result, ﬁrms in these industries spend little on R&D rel-

ative to their sales. At the other end (far right) of the curve, where concentration is

exceptionally high, monopoly proﬁt is already high and innovation will not add

much more proﬁt. Furthermore, innovation typically requires costly retooling of

very large factories, which will cut into whatever additional proﬁt is realized. As a

result, the expected rate of return from R&D is quite low, as are expenditures for

R&D relative to sales. Finally, the lack of rivals makes the monopolist quite com-

placent about R&D.

The optimal industry structure for R&D is one in which expected returns on R&D

spending are high and funds to ﬁnance it are readily available and inexpensive.

From our discussion, those factors seem to occur in industries where a few ﬁrms are

absolutely and relatively large but where the concentration ratio is not so high as to

prohibit vigorous competition by smaller rivals. Rivalry among the larger oligopo-

listic ﬁrms and competition between the larger and smaller ﬁrms then provide a

chapter twelve • technology, r&d, and efﬁciency 321

inverted-u

theory of

r&d

A theory

saying that, other

things being equal,

R&D expenditures

as a percentage

of sales rise with

industry concentra-

tion, reach a peak

at a four-ﬁrm con-

centration ratio of

about 50 percent,

and then fall as con-

centration further

increases.

FIGURE 12-6 THE INVERTED-U THEORY OF R&D EXPENDITURES

0 25 50 75 100

R&D expenditures as a

percentage of sales

More competition Less competition

Concentration ratio (percent)

The inverted-U theory

suggests that R&D

expenditures as a

percentage of sales

rise with industry

concentration until

the four-ﬁrm concen-

tration ratio reaches

about 50 percent.

Further increases in

industry concentra-

tion are associated

with lower R&D

expenditures.

strong incentive for R&D. The inverted-U theory, as represented by Figure 12-6, also

points toward this loose oligopoly as the optimal structure for R&D spending.

Market Structure and Technological Advance: The Evidence

Dozens of industry studies have tried to pin down the relationship between market

structure and technological advance. Because those studies dealt with different

industries and time periods, and used different methodologies, they are not easy to

compare and summarize. Nevertheless, they provide general support for the

inverted-U theory.

Other things being equal, the optimal market structure for tech-

nological advance seems to be an industry in which there is a mix of large oligopo-

listic ﬁrms (a 40 to 60 percent concentration ratio), with several highly innovative

smaller ﬁrms.

Our “other things being equal” qualiﬁcation is quite important here. Whether a

particular industry is highly technical may well be a more important determinant

of R&D than its structure. While some concentrated industries (electronics, aircraft,

and petroleum) devote large quantities of resources to R&D and are very innova-

tive, others (cigarettes, aluminum, gypsum products) are not. The level of R&D

spending within an industry seems to depend as much on its technical character and

technological opportunities as on its market structure. There simply may be more

opportunities to innovate in the computer and pharmaceutical industries, for exam-

ple, than in the brick-making and coal-mining industries.

The conclusion: The inverted-U curve shown in Figure 12-6 is a useful depiction

of the general relationship between R&D spending and market structure, other

things being equal.

Technological advance contributes signiﬁcantly to economic efﬁciency. New and

better processes and products enable society to produce more output, as well as a

higher-valued mix of output.

Productive Efﬁciency

Technological advance as embodied in process innovation improves productive efﬁ-

ciency by increasing the productivity of inputs, as indicated in Figure 12-4(a), and by

reducing average total costs, as in Figure 12-4(b). In other words, it enables society

to produce the same amount of a particular good or service while using fewer scarce

resources, thereby freeing the unused resources to produce other goods and services.

Or if society desires more of the now less expensive good, process innovation enables

it to have that greater quantity without sacriﬁcing other goods. Viewed either way,

process innovation enhances productive efﬁciency: it reduces society’s per-unit cost

of whatever mix of goods and services it chooses and is thus an important means of

shifting an economy’s production possibilities curve rightward.

Allocative Efﬁciency

Technological advance as embodied in product (or service) innovation enhances

allocative efﬁciency by giving society a more preferred mix of goods and services.

322 Part Two • Microeconomics of Product Markets

Douglas F. Greer, Industrial Organization and Public Policy, 3rd ed. (New York: Macmillan, 1992),

pp. 680–687.

Technological Advance and Efﬁciency

Production

and the

Standard of

Living

Recall from our earlier discussion that consumers buy a new product rather than an

old product only when buying the new one increases the total utility obtained from

their limited income. Obviously, then, the new product—and the new mix of prod-

ucts it implies—creates a higher level of total utility for society.

In terms of markets, the demand for the new product rises and the demand for

the old product declines. The high economic proﬁt engendered by the new product

attracts resources away from less-valued uses and to the production of the new

product. In theory, such shifting of resources continues until the price of the new

product equals its marginal cost.

There is a caveat here, however. Innovation (either product or process) can cre-

ate monopoly power through patents or through the many advantages of being ﬁrst.

When new monopoly power results from an innovation, society may lose part of the

improved efﬁciency it otherwise would have gained from that innovation. The rea-

son is that the proﬁt-maximizing monopolist restricts output to keep its product

price above marginal cost. Microsoft used an early innovation in computer software

(its DOS operating system) to achieve a commanding presence in some parts of the

software industry. It built its monopoly power partly on a strategy of continual,

identiﬁable product upgrades, from MS-DOS to Windows to Windows XP, with new

versions in between. These product improvements are often announced well in

advance, and the new versions contain more and more features of competing soft-

ware. Moreover, Microsoft has extended some of its monopoly power to related soft-

ware products (Word, PowerPoint). So although society has beneﬁted greatly from

the surge of product improvements ﬂowing from Microsoft, another result has been

rising entry barriers and monopoly in the software industry. Also, Microsoft contin-

ues to have economic proﬁt far above the long-run normal proﬁt associated with

allocative efﬁciency. Concerned about this inefﬁciency, a federal court in 2000 found

Microsoft guilty of violating U.S. antitrust laws and ordered it broken into two com-

peting ﬁrms. Microsoft has appealed the verdict and breakup order to a higher court.

Innovation can reduce or even destroy monopoly power by providing competi-

tion where previously none existed. Economic efﬁciency is enhanced when that hap-

pens, because the new competition helps push prices down closer to marginal cost

and minimum average total cost. Innovation that leads to greater competition

within an industry reduces the inefﬁciency associated with reduced restriction of

output and monopoly prices. In the Microsoft example, the new technology of the

Internet has, at least temporarily, reduced Microsoft’s dominance in some emerging

areas of the software industry. Speciﬁcally, ﬁrms such as Sun Microsystems have

pioneered new software relating to the Internet (Java programming language),

leaving Microsoft working hard to catch up. So, it is difﬁcult to judge whether

Microsoft’s monopoly power has hindered or abetted innovation. At the time of the

Federal District Court antitrust verdict in 2000, Microsoft was spending $2 billion

per year on research.

Creative Destruction

Innovation may even generate creative destruction, where the creation of new

products and new production methods simultaneously destroys the monopoly

market positions of ﬁrms committed to existing products and old ways of doing

business. As stated many years ago by Joseph Schumpeter, who championed the

view that

In capitalist reality … it is … competition from the new commodity, the new tech-

nology, the new source of supply, the new type of business organization—

chapter twelve • technology, r&d, and efﬁciency 323

creative

destruction

The hypothesis that

the creation of new

products and pro-

duction methods

simultaneously

destroys the market

power of existing

monopolies.

competition which commands a decisive cost or quality advantage and which

strikes not at the margins of proﬁts of the existing ﬁrms but at their foundation

and their very lives. This kind of competition is … so … important that it becomes

a matter of comparative indifference whether competition in the ordinary sense

functions more or less promptly; the powerful lever that in the [very] long run

expands output and brings down prices is in any case made of other stuff.

Many examples of creative destruction exist: In the 1800s wagons, ships, and

barges were the only means of transporting freight until the railroads broke up their

monopoly; the dominant market position of the railroads was, in turn, undermined

by trucks, and, later, by airplanes. Movies brought new competition to live theatre,

at one time the only show in town, but movies were later challenged by television.

Vinyl long-playing (LP) records supplanted acetate 78-rpm phonograph records;

cassettes then challenged LP records; and compact discs undermined cassettes.

Now Internet music recording technology found on sites such as MP3 and Napster

threaten sales of traditional CDs. Aluminum cans and plastic bottles have displaced

glass bottles in many uses. E-mail has challenged the postal service.

According to Schumpeter, an innovator will automatically displace any monop-

olist that no longer delivers superior performance, but many contemporary econo-

mists think this notion reﬂects more wishful thinking than fact. In this view, the idea

that creative destruction is automatic

neglects the ability of powerful established ﬁrms to erect private storm shelters—

or lobby government to build public storm shelters for them—in order to shield

themselves from the Schumpeterian gales of creative destruction. It ignores the

difference between the legal freedom of entry and the economic reality deterring

the entry of potential newcomers into concentrated industries.

That is, some dominant ﬁrms may be able to use strategies such as selective price-

cutting, buyouts, and massive advertising to block entry and competition from even

the most innovative new ﬁrms and existing rivals. Moreover, rent-seeking dominant

ﬁrms have been known to persuade government to give them tax breaks, subsidies,

and tariff protection that strengthen their market power.

In short, while innovation in general enhances economic efﬁciency, in some cases

it may lead to entrenched monopoly power. Further innovation may eventually

destroy that monopoly power, but the process of creative destruction is neither auto-

matic nor inevitable. However, rapid technological change, innovation, and efﬁ-

ciency clearly are not necessarily inconsistent with possession of monopoly power.

Recall from Chapter 2 that we deﬁned allocative efﬁciency as the distribution of

resources among ﬁrms and industries to produce the goods and services most

wanted by consumers. It is attained when the output of each product’s marginal

cost (price) and marginal beneﬁts are equal. Figure 2-2 demonstrated allocative

324 Part Two • Microeconomics of Product Markets

<www.asiaweek.com/

asiaweek/magazine/

2000/0324/cover1.html>

Creative

Destruction City

Joseph A. Schumpeter, Capitalism, Socialism, and Democracy, 3rd ed. (New York: Harper & Row,

1950), pp. 84–85.

Walter Adams and James Brock, The Structure of American Industry, 9th ed. (Englewood Cliffs,

NJ: Prentice-Hall, 1995), p. 310.

<www.forbes.com/

global/1998/1214/

0119038a.html>

Creative

Destruction 101

Consumer and Producer Surplus

and Efﬁciency

efﬁciency using marginal cost–marginal beneﬁts analysis. Productive efﬁciency is

attained when production is carried out in the least costly manner. For a ﬁrm pro-

ductive efﬁciency occurs at an output at which average total cost is at a minimum,

or when the marginal product per dollar’s worth of input is the same for all inputs.

In terms of Chapter 2’s production possibilities frontier, productive efﬁciency

implies a point on the production possibilities curve.

Consumer Surplus

Another way to understand allocative efﬁciency is through consumer surplus, brieﬂy

introduced in Chapter 9’s “The Last Word,” and producer surplus. Consumer surplus

is the difference between what a consumer (or consumers) is willing to pay for an addi-

tional unit of a product or service and its market price. In almost all markets, consumers

collectively obtain more utility (total satisfaction) from their purchases than the amount

of their expenditures (product price × quantity). The surplus of utility arises because

some consumers are willing to pay more than the equilibrium price but need not do so.

Consider the market for black denim jeans depicted in Figure 12-7. The demand

curve D tells us that at $70 no consumers are willing to buy black denim jeans, but

some consumers of black denim jeans are willing to pay more than the $50 market

price. For example, assume Vijay is willing to pay $65; Elise, $60; Dieter, $55; and

Andrea, in contrast, is unwilling to pay one penny more than the $50 market price.

There are many other consumers besides Vijay, Elise, and Dieter in this market

who are willing to pay prices above $50. Only Andrea pays exactly the price she is

willing to pay; the others receive some amount of utility beyond their expenditures.

The difference between that utility value (measured by the vertical height of the

points on the demand curve) and the $50 price is the consumer surplus. For exam-

ple, Vijay is willing to pay $65 for a pair of black denim jeans, but he only pays the

$50 market price, for a utility surplus of $15 (= $65 – 50). When we add together each

chapter twelve • technology, r&d, and efﬁciency 325

consumer

surplus

The

difference between

what a consumer is

willing to pay for an

additional unit of a

product or service

and its market price.

FIGURE 12-7 CONSUMER DEMAND AND CONSUMER SURPLUS

$70

=MB

Quantity demanded

Price (per pair of black denim jeans)

Vijay’s consumer surplus

Total

consumer

surplus

Amount paid

Market Price

Consumers collec-

tively obtain more

utility from their

purchases of black

denim jeans than

their expenditure.

At $50, consumers

obtain a total con-

sumer surplus

represented by the

blue triangle and pay

the amount repre-

sented by the grey

rectangle.

buyer’s utility surplus, we obtain the consumer surplus for all the consumers in the

market. To get the Q* of black denim jeans, consumers collectively are willing to pay

the sum of the amounts represented by the blue triangle and grey rectangle. How-

ever, consumers only have to pay the amount represented by the grey rectangle. The

blue triangle thus represents consumer surplus.

A glance at Figure 12-7 shows that the amount of consumer surplus—the size of

the blue triangle—would be less if the sellers could charge some price above $50. As

just one example, at a price of $65, only a very small triangle of consumer surplus

would exist. In imperfectly competitive markets in which ﬁrms are not price-takers,

consumer surplus would shrink. But if the $50 is the market-clearing price in a

purely competitive industry, ﬁrms cannot charge $65, because they are price-takers.

Any ﬁrm that charged a price above $65 would immediately lose all its business to

the other ﬁrms. Moreover, we know that in pure competition, the equilibrium price

equals the marginal cost of the Q* black denim jeans. And, since we are assuming

that entry and exit have resulted in this price being equal to lowest average total

cost, each seller is earning only a normal proﬁt. By deﬁnition, this proﬁt is just suf-

ﬁcient to continue production of black denim jeans.

The principle that emerges is this: By establishing the lowest price consistent with

continued production, pure competition yields the largest sustainable amount of

consumer surplus. The further we are from pure competition, the smaller the con-

sumer surplus.

Producer Surplus

The idea of producer surplus is somewhat similar to consumer surplus. Producer

surplus is the difference producers receive for a product or service less the marginal

cost of producing it. You will recall that the marginal cost curve is a ﬁrm’s supply

curve. Once again, let’s look at the market for black denim jeans, but this time we

focus on the supply side. Figure 12-8 depicts the supply curve for black denim jeans

326 Part Two • Microeconomics of Product Markets

producer

surplus

The

difference between

what producers

receive for a prod-

uct or service and

the marginal cost

of producing it.

FIGURE 12-8 PRODUCER SUPPLY AND PRODUCER SURPLUS

Producer

surplus

Acme's

producer

surplus

Q* QQ

$50

Cost of

production

(∑MC)

Market price

Quantity demanded

Price (per pair of black denim jeans)

At a price of $30 or

less, no black denim

jeans are supplied.

If Acme can supply

black denim jeans at

$40 a pair but is able

to sell them at $50,

Acme realizes a $10

producer surplus on

each pair. Collec-

tively, producers

realize a producer

surplus represented

by the blue triangle,

while the shaded

area under the supply

curve represents

the marginal cost of

producing black

denim jeans.

with the same market price of $50 and quantity of Q*. Analogous to consumers will-

ing to pay different prices for black denim jeans, producers are willing to supply

black denim jeans at different prices, depending on their costs.

At $30 suppliers are not willing to offer any black denim jeans. But at any price

above $30 and below $50 per pair of jean, there is some producer surplus. For exam-

ple, if Acme Corporation is willing to offer Q

of black denim jeans at $40, but the

market price is $50, the company would realize a producer surplus of $10 per pair

of jeans. At a $50 market price producers collectively will realize a producer surplus

represented by the blue triangle in Figure 12-8. The shaded area under the supply

curve represents the marginal cost of producing black denim jeans.

Efﬁciency Restated

Figure 12-9 brings together Figure 12-7 and 12-8. It depicts a market equilibrium in

a purely competitive industry. What is apparent is that at the equilibrium price and

quantity, the sum of consumer and producer surplus is maximized. Consumers are

getting just the number of black denim jeans they desire and value. Another way of

looking at it is that at equilibrium price, the willingness to pay equals the opportu-

nity cost of producing black denim jeans. At less than Q* fewer black denim jeans

and more of some other good, blue denim shirts, are produced that consumers value

less than black denim jeans. In a purely competitive industry, the price of black

denim jeans will rise, bringing about economic proﬁt, which will bring in more

ﬁrms to produce black denim jeans. The production of more black denim jeans will

reduce their price, until marginal cost equals marginal beneﬁt again. You will recall

that we arrived at the same conclusion in Chapter 2’s Figure 2-2. Allocative effe-

ciency is achieved when the marginal beneﬁt to society of one more unit of black

denim jeans just equals the marginal cost of producing them.

chapter twelve • technology, r&d, and efﬁciency 327

FIGURE 12-9 EFFICIENCY AND THE MARKET FOR BLACK

DENIM JEANS

$70

(MC)

Quantity demanded

Price (per pair of black denim jeans)

(MB)

Producer

surplus

Consumer

surplus

Economic resources

are used efﬁciently

when the sum of con-

sumer and producer

surpluses are maxi-

mized. It is also the

price and quantity at

which MC = MB.

Consumer surplus

is depicted by the

green area below

the demand curve.

Producer surplus is

depicted by the blue

area above the sup-

ply curve.

Underproduction and Overproduction

Figure 12-10 depicts a situation in which the sum of consumer surplus and producer

surplus are not maximized. If production of black denim jeans were an oligopoly,

for example, the price could rise above $50 and production could be less than alloca-

tive efﬁciency requires. At a price of $60, only Q

black denim jeans are produced.

At $60 per pair of black denim jeans, there is an underproduction or not enough

resources allocated to the production of black denim jeans. Economist call this

reduction of consumer surplus and producer surplus a deadweight loss. At $60 per

pair of black denim jeans, the marginal beneﬁt is larger than the marginal cost, sig-

nalling that consumers value black denim jeans more than other alternative goods

than can be produced with the scarce inputs.

Note that at prices below equilibrium, and thus production beyond Q*, consumer

surplus and producer surplus will also not be maximized. To the right of Q* there

is an overallocation of resources, or the marginal cost of producing black denim

jeans is greater than the marginal beneﬁts, indicating consumers do not value black

denim jeans as much as other products that could be produced with the scarce

inputs.

Consumer surplus and producer surplus, along with deadweight loss, allow

economists to easily measure winners and losers in markets. At a more macroeco-

nomic level, they can be used to help design public policy.

328 Part Two • Microeconomics of Product Markets

FIGURE 12-10 INEFFICIENCY AND DEADWEIGHT LOSS

Deadweight

loss

Q* QQ

$70

(MC)

Quantity

Price (per pair of black denim jeans)

(MB)

At prices above the

$50 equilibrium, for

example, $60, con-

sumer surplus and

producer surplus are

not maximized. The

reduction is called

deadweight loss.

There is also dead-

weight loss to the

right of equilibrium.

Deadweight loss rises

as market price and

quantity move away

from equilibrium.

deadweight

loss

The loss of

consumer surplus

and producer sur-

plus when output

is either below or

above its efﬁcient

level.

chapter twelve • technology, r&d, and efﬁciency 329

1945 Grace Murray Hopper ﬁnds

a dead moth between relay con-

tacts in the experimental Mark II

computer at Harvard University.

Whenever the computer subse-

quently malfunctions, workers

set out to debug the device.

1946 ENIAC is revealed. It is a

precursor to the modern-day

computer that relies on 18,000

vacuum tubes and ﬁlls 765 cubic

metres of space.

1947 AT&T scientists invent the

transfer resistance device, later

known as the transistor. It re-

places the less reliable vacuum

tubes in computers.

1961 Bob Noyce (who later

founded Intel Corporation) and

Jack Kilby invent the ﬁrst inte-

grated circuit, which miniatur-

izes electronic circuitry onto a

single silicon chip.

1964 IBM introduces the Sys-

tem/360 computer. Conﬁgured

as a system, it takes up nearly

the same space as two tennis

courts.

1965 Digital Equipment Corpo-

ration unveils its PDP-8, the ﬁrst

relatively small-sized computer

(a minicomputer).

1969 A networking system called

ARPANET is born; it is the begin-

ning of the Internet.

1971 Intel introduces its 4004

processor (a microprocessor).

The $200 chip is the size of

a thumbnail and has as much

computing capability as the 1946

ENIAC.

1975 Xerox markets Alto, the

ﬁrst personal computer (a micro-

computer). Bill Gates and Paul

Allen found Microsoft. MITS

Corporation’s Altair 8800 arrives

on the scene. It contains Intel’s

8080 microprocessor that Intel

developed a year earlier to con-

trol trafﬁc lights.

1977 Apple II, Commodore’s

PET, and Tandy Radio Shack

TRS-80 go on sale, setting the

stage for the personal computer

revolution.

1981 IBM enters the market with

its personal computer powered

by the Intel 8800 chip and oper-

ated by the Microsoft Disc Oper-

ating System (MS-DOS). Os-

borne Computer markets the

Osborne 1, the first self-

contained microcomputer, but

within two years the ﬁrm de-

clares bankruptcy. Logitech com-

mercializes the X-Y Position Indi-

cator for a Display System,

invented earlier by Douglas En-

gelbart in a government-funded

research lab. Someone dubs it a

computer mouse because it ap-

pears to have a tail.

1982 Compaq Computer clones

the IBM machines; others do the

same. Eventually Compaq be-

comes the leading seller of per-

sonal computers.

1984 Apple introduces its Mac-

intosh computer, with its user-

friendly icons, attached mouse,

and preloaded software. College

student Michael Dell founds Dell

Computers, which builds per-

sonal computers and sells them

through mail order. IBM, Sears

Roebuck, and CBS team up to

launch Prodigy Services, the ﬁrst

online computer business.

1985 Microsoft releases its Win-

dows graphical user interface

operating system that improves

on MS-DOS. Ted Waitt starts a

mail-order personal computer

business (Gateway 2000) out of

his South Dakota barn.

1990 Microsoft introduces Win-

dows 3.0 which, like Macintosh,

features windows, icons, and pull-

down menus. Apple sues Micro-

soft for copyright infringement.

1991 The World Wide Web (an

Internet system) is invented.

1993 Intel introduces its first

of several Pentium chips, which

greatly speed up computing.

The courts reject Apple’s claim

that Microsoft violated its copy-

rights on its Macintosh operat-

ing system.

ON THE PATH TO THE PERSONAL

COMPUTER AND INTERNET

Technological advance is clearly evident in the development

of the modern personal computer and the emergence of

the Internet. Here is a brief history of those events.